As we all know now, currency has three functions: store of value, unit of account and medium of exchange. The proponents of crypto have so far alighted their future on the “store of value” leg of the stool. This has not worked out well.

The basic argument is that crypto would operate something like gold, only better. Because unlike fiat currency, it’s impossible for governments to increase the quantity of currency in circulation and thereby degrade it – investing in crypto would protect investors from inflation.

But it just hasn’t worked. We now have record levels of inflation around the world and the price of Bitcoin, for example, is struggling to hold above $20,000. It’s half the value it was at the start of the year, and less than a third its peak value at the precise time it should be showing its, er, metal.

It’s worth noting that the gold price hasn’t been great either, and the same charge that it’s not showing its metal in the face of record inflation could be laid at its door too. But it has done better than Bitcoin, and gold is down about 10% year to date.

What has happened here is simple: mountains – truly mountains – of cash have discovered the bond market. With interest rates at zero or less, bond markets in developed countries had their advantages, but were not particularly scintillating. Now, however, with interest rates rising and well above zero, the technically riskless bond market is making a comeback. For existing bond holders, rising interest rates are bad, but for new investors, there is at least a little yield there.

Until the start of this year, some of the cash that was trying to find some place, any place, to make a return outside of big tech, was finding its way into crypto. But, sadly for crypto, there are new possibilities. 

So rule out that “store of value” leg – at least for now. What about something else?

Well – and this is kinda complicated – there is Web3. 

Web3 will be a new iteration of web which incorporates concepts like decentralisation, blockchain and token-based economics.

I think the most interesting take on this topic, like so many others, is Matt Levine’s “Money Stuff” column on Bloomberg, where he sets out the case. The bottom line is that every product on the web will simultaneously be an investment opportunity, he writes.

That got your attention, didn’t it?

How this will work is that every time you sign up for a Web3 social network or chat room or trading venue, you will get some project tokens. If the project, or the chat room or whatever, takes off, those tokens will appreciate in value. It’s as though you are a shareholder in the web utilities you use. Imagine getting paid actual money to stare endlessly at your Insta account.

Levine says the good part of this idea is that it solves what is known as the “cold-start” issue that bedevils network businesses. Social networks only work if there are other people on the network, but once they work, they work brilliantly. But networks are not very useful for the first users, because they are not networking with anyone. Stands to reason, right?

Free tokens might help this problem because in the “bootstrapping phase”, you might not be getting much utility out of the network, but you will be getting free tokens, which might be worth something someday precisely because you signed on early.

This has actually been used before by a company called Helium. In February this year, the New York Times wrote about Helium under the headline, “Maybe there’s a use case for crypto after all.” 

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Helium is notionally the one real Web3 thing out there; it’s a decentralised network of wireless hotspots for internet-of-things devices. These include online mousetraps. I am not making this up.

The network is available in Stellenbosch and the Cape Town environs. Not sure about the mousetraps. When you operate a Helium network, which you do by switching your hotspot device (which costs about $500 a pot) into the on position, you start earning HNT – the crypto currency associated with Helium. 

This sounds great. It is great. It’s a proof-of-concept. It’s crypto – but useful. Fabulous. Marvellous. The future is here! Not so much.

There are three problems here. The Helium user base has been exploding, as you might expect. There are now 600,000 hotspots around the world, which grew from 14,000 hotspots in January last year to half a million at the end of the year. Turns out, earning crypto by doing nothing has its plus side.

But in July, Helium founder Amir Haleem acknowledged that 99.7% of its income is derived from hotspot onboarding fees. It actually only earned about $6,500 a month from data fees.

As Levine puts it, the bad thing about this idea is that every project is simultaneously a ponzi scheme. 

“It’s hard to know if people are using the project because they get utility out of it or because they hope to dump their tokens on future suckers.”

And on the dumping topic, there is the fact that HNT has dropped in value from R780 to R87 since last September. But, one day in the future, it could still be useful. Andreessen Horowitz led a $111-million token sale for Helium in 2021.

And there is another problem: What are the legalities of this? They are damn complicated, but generally speaking, financial regulators are likely to consider an explosion of Ponzi schemes to be a challenge to financial regulation – not that we don’t have them already. 

In the US, there is an argument which is likely to spread, which is whether this is a market or a product. If it’s a market, then it’s subject to regulation by the Financial Securities Commission. If it’s a product, it’s not.

The argument is fascinating, and it’s worth reading Levine’s take on the legal situation in the US.

In SA, the Reserve Bank has adopted a pretty accommodating approach to crypto, recently discouraging banks from cutting off companies that offer cryptocurrency services. But when it comes to crypto tokens, it’s anyone’s guess. DM/BM